Why is Opportunity Zone deal flow increasing, and by how much?

Chris Loeffler is co-founder and CEO of Caliber, an asset management and real estate services firm headquartered in Scottsdale, Arizona. Caliber Funds is currently offering a $500 million mixed-asset Qualified Opportunity Fund geographically focused in the greater southwest region of the United States.

Click the play button above to listen to my conversation with Chris.

Episode Highlights

• How the outlook on Opportunity Zone investing has brightened substantially compared to just one year earlier.
• How Caliber’s deal flow has increased from $500 million to nearly $3 billion over the past year.
• Examples of Opportunity Zone deals that Caliber is deploying capital into.
• Exit strategies, interim gains, and capital redeployment within the Qualified Opportunity Fund.
• Why Caliber is bullish on multifamily, industrial, medical, entertainment, and education.
• The composition of Caliber’s mixed-asset Qualified Opportunity Fund.
• How the attitudes of investors and their advisers have changed over the last year, from pre-COVID to COVID to post-COVID.
• How investors may react to an increase in the capital gains tax rate.

Featured on This Episode

• Chris Loeffler on LinkedIn
• CaliberCo
• Caliber Funds
• ADISA 2021 Spring Conference
• SALT Conference Las Vegas 2019
• Chris Loeffler OZ Podcast Episode #32 (June 2019)
• Chris Loeffler OZ Podcast Episode #85 (April 2020)

Industry Spotlight: Caliber

Founded by Chris Loeffler in 2009 in the wake of the financial crisis, Scottsdale, AZ-based Caliber is an asset management and real estate services firm that is issuer of a $500 million mixed-asset Qualified Opportunity Fund. They are focused on development of multifamily, commercial, and industrial real estate in the greater southwest United States.

Learn More About Caliber:

• Visit CaliberCo.com to sign up for their newsletter.
• Visit CaliberFunds.com to learn more about their QOF.

About the Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

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Show Transcript

Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson, and joining me today from his office in Scottsdale, Arizona is Chris Loeffler, co-founder, and CEO of Caliber. Chris, thanks for joining me again. Welcome back to the podcast.

Chris: Thanks, Jimmy. It’s good to see you again. It’s good to see you here in the hallways of Caliber in lovely Scottsdale, Arizona.

Jimmy: Absolutely. Yeah. I’m in town for the ADISA Conference this week. So, getting around town a little bit, finding some Opportunity Zone friends in and around the greater Phoenix area, so happy to be visiting at your office today. It seems like we talk every spring. We had our first interview at the SALT Conference way back in spring of 2019, pre-COVID. Things were gearing up pretty nicely for the Opportunity Zone industry, and then we spoke again last April of 2020. And I think it was my first or one of my first post-COVID episodes that I did, and we talked about how COVID was affecting Opportunity Zone marketplace and Opportunity Zone and investors.

So, now we’re in may of 2021 and we’re starting to pull out of COVID. So, I want our episode today and our conversation to focus on that new outlook. So, first question to you Chris is, what was your outlook like a year ago, spring of 2020, and what is it like now for the Opportunity Zone marketplace spring of 2021 coming out of COVID?

Chris: Well, you think about it almost as a metaphor. When we were doing that interview, I was at home. I was probably wearing sweat pants and talking to you from my home office, and then going out and walking around in my backyard so that my toddler could sleep during nap time while I was doing business, right? And now, here we are back in the office with two humans that are actually…don’t tell the CDC, but I think we’re four feet apart from each other. And it’s kind of going from dark to light.

In February of 2020, we were so geared up for a huge year. We had a lot of deal flow coming in. We were expecting to at least double the capital raise from the prior year. We finally had all of our rules and regs from Opportunity Zone investing done, and we knew exactly what to do with the money. And then, of course, COVID hit and the country went through a really tough period of time. And you know, when you’re an investor trying to figure out whether you can get toilet paper and how you’re going to get your groceries, the last thing you’re thinking about is how to invest for 10 years and avoid taxes.

And so, you saw a capital flow fall off the face of the earth, and I’m sure many of your guests have said the same thing. But for us, as investors, on the other side, once the capital comes into our fund, we then have to make smart decisions about what we’re going to put the money into. And we didn’t know what to do either. We didn’t know what to buy, we didn’t know what was going to be a good deal or a bad deal coming out of this thing, and we didn’t know what was safe and what was not safe.

And so, we pulled out of the market in March immediately. We dropped every contract we had and every deal we had, which was expensive, of course, because we’d spent a lot of time and money on pursuit costs trying to buy these projects. And then we re-entered the market back in October of last year. So, it’s now May, almost what? Six, nine months down the road? And we’ve seen the amount of projects in our pipeline go from about $500 million to probably about $2 billion to $3 billion worth of real estate, which is about a five times increase from where we were at a year ago.

So, the short answer is things are going great. I mean, I think investors are looking for some way to avoid capital gains taxes obviously, and we are finding really great places to deploy the capital.

Jimmy: Yeah. So, that’s an incredible deal flow that you’re seeing coming out of COVID now. Talk to me. You said you’re in the billions of dollars now in terms of deal flow, good deals that you’re seeing in Opportunity Zones. Can you drill into some specific projects that you like that you’re working on?

Chris: Yeah. You know, I think it’s been a really diverse mix. So, about a month ago, we closed on the construction of a private school. So, it’s sort of like a build-to-suit deal where we acquired the land. The school is actually an investor and wrote a lease for us, and then we’re going to construct the building that they need and then they eventually buy it off of us. So, it’s a great kind of wrapped-up project and pretty easy to execute on what they need and know where you’re building it and that kind of stuff. And because of that, we’re also looking at multiple additional school deals.

And a school is a great Opportunity Zone investment because if a school needs you to come in, develop the project, to put in the capital, but then they eventually want to own their buildings in most cases, so it’s kind of a nice combination.

Jimmy: So that’s your exit strategy there as you sell it back to the school?

Chris: Yeah, right there.

Jimmy: Do you have to wait 10 years to sell it back to the school?

Chris: You don’t have to. It’s really up to you. It’s up to the way you structure it. We actually structured this deal so that we could sell earlier and then redeploy the capital into a new deal. We’ll take some interim gains, but we actually get a compounding effect on the return on investment. So by the time we exit the 10-year period, if we roll that gain two or three times, we’re going to have a bigger, bigger exit and a much bigger tax benefit on the backside.

Jimmy: And the way your fund is structured when you exit within the fund, it doesn’t restart the clock for your LP investors, does it?

Chris: No. I mean, that’s the benefit of investing in a mixed fund with active management because we can follow the guidelines, redeploy the capital within 12 months. And in real estate investment, more often than not after the first three to five years, you’ve captured the majority of the upside in the deal. And if you don’t cycle that capital, you’re not going to see the type of return that you could get over a 10-year period if you were to turn that money at least twice. So, we’re doing that with this particular deal and we probably will do that with these types of deals on a relatively regular basis because, back to the original point, we have good deal flow.

But a school accomplishes such great things for the community and accomplishes such great things for the investors. It’s great for the banks because it typically brings in CRA credits and other things that banks enjoy from a lending perspective. And it also captures a major trend coming out of COVID that parents are looking at school choice and they’re looking at, “Gee, maybe I do want to send my kid somewhere where I’m not going to be subject to the whims of teachers’ unions and other things like that.” So, I think that that’s a big trend in the country and we’re on top of it.

Jimmy: That’s great. So, is it just the one private school that you’re building right now?

Chris: Yeah. Right now, just the one that we started, and then we are engaged with a group that has 50 schools across the country that would like us to build another roughly 12 for them. So, we do a project and we learn how to develop a school and build it appropriately, we then want to leverage that knowledge to do it multiple times. And in the fund format that we use, this mixed-asset fund, where we can raise capital over periods of time, it allows us to do that. But aside from that, I mean, we’re getting into…we’re building, I think what will be $3 to $500 million corporate innovation campus under the guise of the new smart cities rules that are out there in the world of sustainable development. So, that’s kind of a cool deal.

Jimmy: And where’s that development.

Chris: We think it’s going to be here in Scottsdale, Arizona, definitely in the Phoenix MSA. We have a site in Scottsdale that we’re targeting, but it’s just all the new technology around sustainability, around smart cities, IoT, that kind of stuff we’re incorporating into this campus. That’s going to be an interesting project. We’ve got a big medical development that we’re working on also in Arizona with some medical office buildings that we’re building surgery centers. We did a behavioral health hospital in Phoenix as well.

So, I think that coming out of what we saw in COVID, we saw strength in a couple of categories in real estate investment. Multifamily was obvious. Industrial is another obvious one. Medical, that was really good one that still kept that office tenant, and we saw strength in that. And then things like entertainment, education, etc. As long as it had an outdoor component to it, it seems to be a good play going forward. So, I think that we’re going to see a big travel boom, I think we’re going to see a big entertainment boom. I think we’re going to see people, like I said before, pushing towards maybe alternative choices for education for their kids, and we want to be on top of all that.

Jimmy: Yeah. Maybe we could zoom out a minute here and talk about what your investment thesis is overall at Caliber, and which geographies you like to invest in, specifically for those who may have missed our first two conversations. Maybe we can just review a little bit what Caliber does, what Caliber is all about.

Chris: Yes. Opportunity Zone is one of the things that we do. It’s one of our funds, but we also have a development fund that is not Opportunity Zone-focused. We do core real estate investing, which is basically investing in income-producing assets, and then we do some private lending as well. So, for an investor, what we’ve designed at Caliber is you can come to one place, build trust ones, and then depending on what it is that you are trying to accomplish with your investments or what your goals are, we’ll have an option for you. If you like to invest project by project, we’ve got that. And if you like to invest in a fund format, we’ve got that. And then we focus on a region that we’ve sort of cobbled together, which is a combination of states in the Southwest and the Mountain West region, specifically Arizona, Colorado, Texas, Nevada, Utah, and Idaho.

We find that cities like Boise and Phoenix, Denver, Austin, San Antonio, are all the attractive places where people want to live. And that was true prior to COVID and it’s gotten even more true today. And regionally, we can have enough market expertise where we’re really, really close to the ground and we know the projects. We know the city council members, we know the mayors, we know the people involved and the players involved, and we can really have, I think that big fish in the small pond effect, but at the same time, focus on a region that is small enough that we don’t overextend ourselves.

So, part of our strategy has always been to be…they call it place-based in this Opportunity Zone incentive, where you go into a specific area and you figure out, “What does that area need?” and you build that. We were doing that prior to it having a name, which is basically, understand your market, understand what makes sense to invest in, and then build it.

And as far as a return profile goes, it’s basically the same thing for every deal. We want to double the value of our equity every five years no matter what we invest into. Sometimes that’s kind of a two and a half times, three times number if it’s a more risky type product, sometimes it’s 1.75 if it’s a really safe product. But at the end of the day, it all blends down to a 2X equity multiple. And so, we look for that across every project we ever do and if you do that twice in a 10-year period, you’ve got a 4X return on the investment. So, that’s really important for Opportunity Zone investing because the main incentive of the tax program is you don’t pay capital gains taxes on the future growth. So, it’s much more important to invest, to grow the value of the equity than it is to invest in like core real estate where you’re just looking for a rental return.

Jimmy: Yeah, that makes sense. I want to revisit that in a minute in terms of tax-free growth. We’ll talk about what Biden has proposed or is proposing and some of the math there, how that changes the opportunities. But first, I want to ask you about your fund. Let’s talk about your fund specifically for a minute. How many projects is your fund going to ultimately invest in your qualified opportunity fund?

Chris: I think that depends on capital flow. We designed it to max out at $500 million raise. We’ve raised about $85 million to date. I think we would have raised probably close to $200 million by now had we not had COVID, and we certainly have the capacity to deploy the capital. I think we’ll probably get it to about that $200 million number and then we’ll probably cap it out and do fund two if there’s an opportunity to do fund two. And in that case, we use about 50% leverage, so you’re looking at about $400 million worth of projects. So, how many projects does that turn into? Well, on average, we’re doing $20 to $30 million projects, so you kind of divide $400 million by $25 million and it’s like, what? Whatever much that is.

Jimmy: Someone get us the calculator. It sounds like it’s probably about 15 to 20 projects, something like that.

Chris: Yeah. About 15 to 20 projects is probably about right. But in some cases, a project for us is like 10 buildings. So, we’ve got about a $25 million investment in downtown Mesa, Arizona, which is roughly 10 buildings. And so, it could be anywhere between 30 to 100 buildings at the end of the day because some of these things are smaller, but that’s about where I think it’ll land. So, as an investor, right now, you would own your equitable share of the six major projects that we have in the fund, which is again, roughly 15 buildings at this point in time. So, when you’re coming into our fund, you actually get to know what you’re going to own for a portion of your capital, and then you’ve got a pretty good understanding going forward on what it is that we’re gonna buy.

Jimmy: Right. So, the investors coming to your fund, they’re really buying into your expertise, your team, and your strategy.

Chris: That’s right.

Jimmy: You haven’t identified all of the deals that you’re going to deploy capital into, and you may end up…the six or seven that you’ve already identified, those may turn over. You may cycle out of those and in new assets over a 10-year holding period. Is that right?

Chris: That’s right, because I think that’s the right way to invest. Because at the end of the day, what does 10 years from now look like? I can’t answer that question. I don’t think you can either. I don’t think anyone can intelligently. I mean, there’s some futurists out there that make a living off of that type of stuff, but at the end of the day…

Jimmy: Well, even 18 months ago, nobody could have foreseen COVID, right?

Chris: Yeah. Who would have known? Who would have known that? Who would have known prior to COVID that there was going to be a major reversal in the trend of people wanting to be walkable and in denser and denser areas? And now there’s a major return to the suburbs. Who would have known? I never would have predicted that in a million years. And had we focused all of our investing in Manhattan, as an example, we would be getting crushed right now. So, you just don’t know how the world is going to change, and so you have to be a little bit more flexible with your decision-making. And so, that’s what we’ve designed within the product, but at the same time, investors want to know, “What am I going to get into?” And if they can look at the projects we currently have, they can see the pipeline, they can see our track record, they know that we’re going to consistently get them into projects that will deliver a return that’s attractive.

Jimmy: Yeah. That makes sense. So, let’s shift gears now. Let’s talk about attitudes from investors. We talked about how your deal flow has changed. It’s nearly 5X from pre-COVID to COVID. We talked about some of the projects that you’re investing in. I want to hear about the attitudes from investors. How have investor attitudes changed over the last 12-plus months pre-COVID, COVID, and now coming out of COVID? What are you hearing from your investors?

Chris: I think some of the big shifts that we’re seeing is that now the professional services community is getting highly engaged. So, I would define that as investment advisors, tax planners, lawyers, etc. And they were interested prior to COVID and they were starting to approve these types of investments on their platforms in whatever way that they do. But then when, of course, the pandemic hit, the motivation to continue to explore the product as an investment choice for their clients kind of fell apart. So, we’re seeing that come back strong. We’re seeing a lot of capital coming in from investment advisors, in particular, who are looking at selling off stock portfolios and shaving those gains, and protecting them essentially on a go-forward basis. So, we’re seeing quite a bit of that. We’re getting a lot of flow from hedge funds, we’re getting a lot of flow from just all kinds of interesting sources of capital that we hadn’t seen before.

On an individual investor basis, I think that individual investors, long before their advisors, came to the conclusion this was probably something that was interesting to them, but now there’s enough information out there from people like yourself and others, where I think there’s a lot of investors that are coming to us pre-educated knowing what the program is, how it could benefit them. And now they’re just trying to make selections on who are the best sponsors to invest with. So, that’s been great because I think the first year and a half of this, we spent a lot of time…

Jimmy: Yeah. So much of 2018 and 2019 was just focused on, “Wait, how does this incentive work? What’s going on? And just having to educate investors and their advisors over and over and over again. Now, it was seemed like going into 2020, people had a pretty firm grasp of what the OZ deal was all about, but then COVID tanked everything and now we’re finally pulling out of it I feel.

Chris: A lot of them had a lot of time sitting at home in 2020 researching stuff about their finances. So, they spent a lot of time doing that as well. So, for investors, we’re seeing a huge return back to the product. And I think that we’re seeing large check sizes, a lot of interest, and a lot of folks that do want to see that combination of financial return, and community impact. And so, we’re trying to display both and show folks that, “Yeah, you can build a school and make money at the same time.”

Jimmy: And what do your investors like about you specifically? What makes you unique at Caliber, what you’re doing?

Chris: We’re a tweener. We have an institutional infrastructure here, so they can feel safe investing in our fund. You know, the fund’s audited by Deloitte. We’ve got a really great team that manages the product. We’ve got other sources of revenue beyond this fund, so we’re not trying to generate outsized fees that are outside the market or something like that. So, we’ve got that institutional infrastructure that they know that we’re not going to mess up their tax incentive, and we’re going to manage the capital appropriately, especially when you’re making a -year investment that oftentimes for investors is seven figures in size. But then we are still on the ground involved in deals. Almost every project we acquire is off-market. We’re still at that really close to the project entrepreneurial deal platform. And what that creates for the client is a much better return, right?

You could go to Morgan Stanley or Goldman Sachs and they’re wonderful institutions, and they do amazing things for their clients, but if you’re gonna invest in their OZ fund, it’s going to be kind of a fund of funds. It’s going to be layers of management between you and the deals, and that affects the return. And so, you get a little bit of both with us, and I think people feel confidence with that, and they know that we’re going to be there 5 and 10 years from now taking good care of the project, delivering what we said we were going to do, and then giving them a good experience.

And at first, you’re like, “That’s a great tax incentive and I can buy some cool real estate, and I’m going to make a good return. That sounds awesome.” But three years from now, when you’re still sitting on the investor calls, and you’re still relying on these people to deliver for you for the next seven years beyond that, you got to really assess, “Do I like these folks? Do I trust them?” So, it’s been a really good experience being close to the investors and giving them the opportunity to do exactly what we’re doing. Come in, meet, explore the projects, do property tours, and do that kind of stuff, but at the same time, give them that, like I said, institutional quality experience.

Jimmy: Now, that’s great. What are you hearing from your investors about the proposed tax changes? Are they concerned about Biden and his administration potentially raising capital gains tax rates possibly to the high 30s, low 40s? I mean, we’re talking about some pretty big numbers there. How does that change the math on investing in Opportunity Zones?

Chris: Yeah. I think that’s the biggest…I think everybody’s concerned about that for obvious reasons. So, he started out with, I think his proposed rate of 39%, which was very Trumping of him if you think about it because I don’t think it’s going to end up at 39%, but he’s…

Jimmy: There’s a negotiating tactic. That’s how I see. it

Chris: Yeah. He definitely swung for the fences there. So, these things all tend to go in the same direction. You take the current rate, you take the proposed rate, you cut it in half and everybody meets in the middle, right? So, chances are the rate’s going from 20% to 30%, right?

Jimmy: Yeah.

Chris: So, everybody kind of has started to circle around that number. And then the question becomes, okay, if I could take a 20% tax hit today, why don’t I just take the tax hit and pay the taxes? Or I could avoid taxes on my Opportunity Zone investment, but I might have to pay at a 30% rate five years from now at this point in time, maybe five and a half years from now. So, what’s the best move?

And the answer is, do the math. If you just run the model and you assume, I think a reasonable growth rate, which we assume about 8% a year in annual growth and the value of the investment, which is actually below what we expect to return on our fund but I think it is a good model to compare to like a stock market investment or something like that, then you’re going to see that, yeah, if the tax rates go up and you have to pay a higher rate five years from now, your return on investment is affected slightly. But the fact that you get to see significant growth in the value of your investment and then you don’t have to pay that next round of taxes on that growth at that same high rate, it ends up negating most of the effect of the growth of the tax rate.

So, you’re still seeing that in an OZ investment as compared to a traditional investment and an 8% annual growth rate, you’re making almost three times the ROI on the OZ investment with the same rate of return underlying. And it’s all based on the tax effect of avoiding taxes and avoiding paying future rounds of taxes down the road. And, of course, being able to invest that capital gain that you had in full for five years before you actually have to pay those taxes.

Jimmy: Right. In many ways, it makes that exclusion incentive much more attractive, I think.

Chris: It does. It really does if you run the math out and if you think, “Okay, if they raise taxes to 30% today…” Well, I mean, look at the spending going on, look at the debt that we have. Do you think it’s going to stay at 30% or do you think it’s going to go to 35% or 40%? I think it’s probably going to keep going up. And so, you’re getting a bigger and bigger incentive, the bigger that that rate goes up because of the protection on the growth side. And then, of course, there’s the other side of the equation, which is, while they spend all this money and they issue all this debt, what does that do to the economy?

Inevitably, it starts to inflate prices. And so, we’re seeing that in lumber, we’re seeing that in labor, we’re seeing that in oil, we’re seeing that in milk, we’re seeing that in everything that we do. We’re seeing that in rents, we’re seeing that in wages, we’re seeing it across the board. And as you start to see that, what do you need as an investor? You need a hedge against inflation. And whether it’s gold, there’s income-producing real estate, those are number one and number two, historically speaking, as the best hedges against inflation in the world. Maybe Dogecoin, I don’t know. We’ll see how the coins work out.

Jimmy: Dogecoin took a hit over the weekend.

Chris: Okay. Well, there you go. So, it’s a little volatile for inflation hedge, but…

Jimmy: Yeah. It’s a speculative asset.

Chris: Yes. So, I think income property has always been a clear winner in terms of a hedge against inflation. And you’re going to see that you’re combining a really great inflation hedge with a really great tax incentive that avoids paying taxes on the value growth. And if you think the value growth in real estate is going to come from inflation, you’re probably right. If lumber is going to go up and continue to go up and other things like that go up, all real estate is one big basket of commodities. And whatever it costs to build it, the labor, the nails, the lumber, the glue, you name it, all of that stuff as it inflates, that’s what makes it so that your building that you bought for $10 million today, you can sell for $20 million in 10 years. That is also going to drive your growth in the value of your investment and your tax incentive.

Jimmy: That’s a good way of looking at it.

Chris: Yep.

Jimmy: Well, we made it through almost 140 episodes of the Opportunity Zones Podcast before we had a Dogecoin mentioned. So, thank you for that, Chris. It’s been a pleasure talking with you today. Thanks for joining me again. Let’s do this again, maybe in 6 to 12 months, get another update. Before we go today, can you tell our listeners where they can go to learn more about you and Caliber?

Chris: Yeah. So, if you go to our website, which is caliberco.com, Caliber spelled like caliberco.com, you can find out about our business as a whole, you can learn about all the different funds that we have to offer, and then you can start to dig into our Opportunity Zone investment fund. If you join our newsletter, you’ll get our propaganda. We promise not to spam you too much, but we also include things like blog posts and things like that to just try to kind of keep you abreast of our view of the world. And hopefully, that will help you as an investor as you grow.

Jimmy: Yeah. You guys are doing a great job there. I appreciate your insights today, Chris. Thanks for joining me again. For our listeners out there today, I will, as always, have show notes on the Opportunity Zones Database website. You can find those show notes at opportunitydb.com/podcast. And there you’ll find links to all of the resources that Chris and I discussed on today’s show. And I’ll be sure to link to caliberco.com and I’ll link to their email newsletter sign up as well. Chris, again, thanks for joining me today. I appreciate it.

Chris: Thanks, Jimmy. Great to see you.

Jimmy: You too.